Battle to restore loans to business

Britain and Ireland yesterday stepped up their efforts to shore up their decaying banking systems as the credit drought worsens.

Bank of England: Businesses face funding pressures

The UK Treasury announced a significant U-turn by hacking back the fee it charges to guarantee £250bn of loans that banks make to one another.

And across the Irish Sea, Dublin announced a recapitalisation plan that mirrors the £37bn scheme introduced by the UK in October. The steps came amid further evidence that banks are hoarding liquidity rather than extending loans to cash-starved firms and households.

Yesterday the Bank of England warned that European companies are facing 'significant near-term funding pressures' as they prepare to roll over £538bn of debts next year. Of the total, just over £4bn is owned by banks and other financial groups.

Under its new plan, the Treasury will reduce the fee it charges for its guarantee scheme and lengthen its duration from three to five years.

The scheme was originally attacked by City experts as imposing 'penal conditions' that are much tougher than those imposed by the US.

The Conservatives said the UK must go further. A spokesman for Shadow Chancellor George Osborne said: 'This is an admission-that the government got the details of their financial rescue package wrong. Whilst they are now following the Conservatives' advice, the changes announced are still nowhere near enough to get lending flowing to business.'

Meanwhile, Dublin pledged to pump up to £9bn into its own beleaguered banking system. The government is trying to enlist private equity firms and big institutional investors to support an equity-raising scheme.

If they fail to take the bait, Irish taxpayers will end up as the biggest investors in Allied Irish Bank, Bank of Ireland and Anglo-Irish Bank.

But experts warned that £9bn may not be enough to revive Irish banks, which are facing massive losses from the meltdown in the property market.

Here, Financial Services Authority chief Hector Sants acknowledged Britain's £37bn injection of cash in Royal Bank of Scotland, Lloyds TSB and HBOS may not be sufficient.

He told the Treasury Committee that calculations about how much capital the banks needed were based on 'a set of forecasts about the future'. He added: 'The out-turns may not always follow the forecasts.'